Big Oil calls on Russia for guarantee

Minus locked-in deal, firms say new field development risky

MICHAEL DAVIS, Copyright 2002 Houston Chronicle

Published 5:30 am, Wednesday, October 2, 2002

Russia must offer long-term deals locking in terms and taxes owed by foreign oil companies or risk losing the billions of dollars it needs to develop its oil and gas reserves, the chairman of ConocoPhillips warned Tuesday.

Western companies have long demanded production-sharing agreements, commonly known as PSAs, before they invest in major projects, but Russia has been reluctant to grant such deals.

Certainty about taxes and tariffs over the life of a project will enable Western companies to project how much they will be able to earn if fields produce as expected. Under current conditions in Russia, foreign investors are subject to often-changing legal conditions and taxes.

ConocoPhillips Chairman Archie Dunham said companies have learned from experience the need for commitments. Before its merger with Phillips, Conoco had done business in Russia since the late 1980s. The company's Polar Lights joint venture with two Russian companies has produced more than 90 million barrels of oil since its inception in 1991.

But despite its production, Polar Lights has been only marginally profitable because of tariffs that seemed to change almost daily and tax laws that seemed to change by the month, Dunham said.

"ConocoPhillips is eager to do more in Russia as soon as the administrative and commercial basis for our cooperation can be strengthened," Dunham said. "In particular, we need to see the adoption of a consistent and comprehensive production-sharing agreement framework."

A proposed law that would streamline the process for issuing PSAs is pending before the Duma, Russia's legislative body. German Gref, Russia's minister of economic development and trade, estimated Tuesday that the energy law that contains the production-sharing guidelines could pass late this year or early next year, depending on the debate over the budget.

Peter Robinson, vice chairman of ChevronTexaco, said there is a role for international oil companies in mature fields, but ChevronTexaco's focus will be on frontier areas.

In mature fields, the economics can support an investment under the current tax and license structure, Robinson said, because the company would see revenues almost immediately. But in frontier areas with the most potential, such as Sakhalin Island and the Arctic Shelf, a company must make huge investments before seeing meaningful revenues.

"PSAs have the ability to attract large amounts of capital that not only can open up the frontier but will build infrastructure that will facilitate the further development of Russia's continental shelf," Robinson said.

Under current laws, each PSA is negotiated by a commission created for the task. Dunham suggested that four or five permanent commissions be established, each representing a region of the country.

Dunham cited a project named Northern Territories as a good example of a major development that has been on hold while the company has attempted to negotiate a PSA. The fields in the project are believed to hold more than 1 billion barrels of oil and 2 trillion cubic feet of gas.

Production of those reserves could add $25 billion to Russia's economy over the life of the project, expected to require a $1 billion investment in the first five years, Dunham said.

"We have been `working on' this project since March of 1998, when Conoco signed a memorandum of understanding with Lukoil," Dunham said.

U.S. Secretary of Commerce Don Evans briefly referred to the PSA legislation in his opening remarks, saying, "This important legislation needs to be passed soon so there can be certainty in Russia's oil and gas investment climate."

It is projected, Evans said, that the Russian oil sector will need $10 billion a year or more to increase its production and about $8 billion a year to maintain it.

Also Tuesday, Koch Industries said it will deliver the first shipment of Russian crude oil to the U.S. Strategic Petroleum Reserve this month. Koch Supply & Trading will deliver 285,000 barrels to the reserve next week. The shipment is part of a contract with Koch to supply 8 million barrels of crude oil to the reserves from October through April.